Gold futures suffer 4% weekly loss

Silver, copper end lower for the week; indexes at lowest since late March

SAN FRANCISCO (MarketWatch) -- Gold futures fell Friday to close at their lowest level in two months, suffering a cumulative four-session loss of nearly $36 an ounce to end the week down more than 4%.

Gold appears susceptible to pressure from fund managers squaring their books and from weakness in global stock markets, said Jon Nadler, an analyst at bullion dealers Kitco.com. He said the assassination of al-Qaida in Iraq leader Abu Musab al-Zarqawi this week also put pressure on gold prices.

"A negative bias continues to pressure prices for the moment," said Nadler.

Gold for August delivery closed at $612.80 an ounce on the New York Mercantile Exchange, its weakest closing level since April 13. The contract ended with a loss of $1 for the day and a loss of $28.20, or 4.4%, from last Friday's close of $641. It's also about 16% below its May peak of $732.

Prices have lost a total of 5.5% since Monday's closing. On Thursday alone, gold gave up more than $18 as a rally in the U.S. dollar -- sparked by a growing conviction that the Federal Reserve will raise interest rates at its meeting in late June -- sapped demand for precious metals.

"Gold may have closed down, but as long as it holds that area of support the market has a decent chance of rallying sharply next week," said Dale Doelling, chief market technician at Trends In Commodities, referring to the 100-day moving average of $608.90 as support.

"The market has reached such a severely oversold condition that the odds of a bounce here grow stronger each day," Doelling said.

The dollar traded little changed against major foreign-exchange counterparts Friday despite solid U.S. economic data that showed a narrower-than-expected trade deficit and a surge in import prices. See Currencies.See Economic Reports.

Overall, "the negative bias has not dissipated from the precious-metals markets and gold might well see a $600 to $605 reading if interest-rate jitters and slowing global economies continue to dominate headlines," said Nadler.

"Fortunately, gold is not really a commodity," he said, because it isn't susceptible to a drop in the face of economic slumps. Instead, gold trades like a "currency," according to Nadler.

So "as the supply of dollars chasing a finite amount of gold has quadrupled since 1980 -- and as the current gold bull market started running at about $250 per ounce -- the resulting math leads many to believe [the current] correction notwithstanding, gold's ultimate peak may well lie much higher," he said.

For now, "it's just that not many are willing to stick their necks out and also say when that peak might take place," Nadler said.

Meanwhile, Merrill Lynch raised its 2006 gold price forecast to $650 an ounce from $525, and raised its 2007 outlook to $675 an ounce from $500 an ounce.

"Positive drivers for gold include potential inflationary pressures in the U.S., heightened geopolitical risk (Iran and South America), the Merrill Lynch FX team's forecast for a weaker U.S. dollar, continued de-hedging and lower central bank sales," said analyst Jason Fairclough.

Also for 2006, Merrill also raised its price forecasts by 53% for copper, to $3.06 a pound, and by 19% for platinum, to $1,159 an ounce.

Upbeat view

For now, July copper closed down 8.95 cents, or 2.7%, at $3.2675 a pound, pulling back following an earlier rise to $3.47. A week ago, the contract closed at $3.5865 so it's down 8.9% from last Friday.

"Copper continues to show some weakness but, for the most part, this retracement has been well contained above its 50-day [moving average] ($3.2764) and has now reached highly oversold condition," said Doelling. "A bounce off this support area could put copper back on course and eventually have the shorts running to cover."

July platinum tacked on 10 cents to close at $1,190.20 an ounce, closing more than 4% below the week-ago level.

July silver closed up 13.5 cents at $11.21 an ounce, down around 7% from last Friday's closing level. The September contract for palladium rose $3 to end at $325.55 an ounce, closing down almost $33 for the week.

On the supply side, gold inventories were unchanged at 7.79 million troy ounces as of late Thursday, according to data from the New York Mercantile Exchange.

Silver supplies fell by 105,974 troy ounces to 105.8 million troy ounces, and copper supplies were down 75 short tons to 8,951 short tons.

Oil adds support

Strength in oil prices, which climbed above $71 Friday, added some carryover support to the precious metals.

An International Atomic Energy Agency report showed that Iran has been installing more enrichment machines and that new traces of highly enriched uranium have been found in the country, the BBC news service reported late Thursday.

Iran is currently studying a package of incentives offered by western governments seeking to persuade Tehran to halt its nuclear research.

However, the western nations' concerns over the situation in Iran could have been somewhat allayed by a statement on the situation from Javier Solana, foreign policy for the European Union. He said that he was "more optimistic than pessimistic" about resolving the situation, the BBC reported. See Futures Movers.

Indexes mark a weekly loss

Indexes that track the metals-mining sector fell Friday to close at their lowest levels since late March -- suffering a loss of more than 10% for the week.

The Philadelphia Gold and Silver Index
XAU, -0.82%
closed at 128.42, down 0.7% for the session and ending 10.6% below last week's close. The CBOE Gold Index
GOX, -0.56%
fell to 129.18, closing down 0.5% on the day, down around 12.1% from a week ago.

The Amex Gold Bugs Index
HUI, -1.97%
lost 0.8% to close at 299.71, with shares of Hecla Mining
HL, -2.69%
making the biggest decline, closing lower by 3.3% at $4.72. The index was 11.2% below last week's ending level.

Also Friday, the StreetTracks Gold Trust exchange-traded fund
GLD, -0.75%
fell 46 cents to close at $60.45, while the iShares Silver Trust ETF
SLV, -0.56%
shed 43 cents, or 0.4%, to end at $111.92.

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